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Big Expectations Create High Hurdles for Under Armour

Move over Nike and Adidas. Under Armour has put on its running shoes and it is ready to race.

Under Armour(NYSE:UAA) is an impressively fast-growing sportswear company going toe to toe with the big boys in the industry. It is the David to giants like Nike(NYSE:NKE) and Adidas(NASDAQOTH:ADDYY).

Nike and Adidas both dwarf Under Armour with sales of $26 billion and $19 billion, respectively. Under Armour's $2.2 billion runs a distant third to the two giants in shoes and sportswear. However, if CEO Kevin Plank has his way the race has only just begun. He passionately believes that Under Armour has the speed and endurance to catch the competition.

Long may you runUnder Armour began in a basement making lightweight compression undershirts that wicked moisture away rather than absorbing it, making workouts drier and lighter. The company has traveled lightyears from its humble beginnings and now makes a complete line of athletic wear, and most recently running shoes and cleats. Shoes have been the most difficult puzzle to solve, and its a market in which both Nike and Adidas continue to dominate.

Nike is the big dog in shoes, with 57% of its revenue coming from footwear sales and only 27% from apparel. Adidas sees more balanced between segments, with 46% of sales in shoes and 42% in apparel. Under Armour has yet to make footwear a killer segment, and it's only 13% of revenue--apparel sales are 76%.

Nike sold an impressive $14.5 billion in athletic shoes in 2012 and Adidas came in at $9.5 billion which both overshadowed Under Armour's $239 million. Under Armour remains undeterred and the changes and innovations keep coming as the company tweaks the shoes to get runners to try them. Sales are increasing.

Under Armour's hare to Nike's tortoiseUnder Armour's growth has been more dazzling than Usain Bolt's record 9.58 second 100m dash. If Plank can continue his charismatic pushing of Under Armour product into new market segments, growth for the company may be in its first of many laps. Plank is dynamic and driven, and he is positioning Under Armour for long and profitable growth.

Meanwhile Nike's appeal is not in high growth bursts, but in measured sustainable and predictable performance year after year. Nike's compound annual growth rate has been 9.9% since 1994. Under Armour's run has been spectacular. It looks like Kevin Plank has every intention of keeping it there with expansion into the international market and perfecting the athletic shoe.

Under Armour has been a domestic growth story to date, increasing revenue by nearly nine-fold since 2004. Of the $1.8 billion in 2012 revenue, international markets accounted for only $108.2 million, or just 6% of revenue.The next phase will be an aggressive advertising push planned around the 2014 World Cup and the 2016 Olympics -- both in Brazil.

Third quarter -- nice field goal but no touchdownUnder Armour reported a 26% increase in revenue to $723 million, and EPS was $0.68. Footwear sales increased 28%, and guidance for 2013 was raised. So why was the stock tackled hard by the market and shares slammed for a 5% loss? Market expectations are high and when the market factors in touchdowns and only gets field goals, that isn't good enough. Under Armour sells at a premium compared to the competition, and high valuations lead to higher and bigger expectations. It is 8% off the 52-week high, but it is a long way from the $50 it traded at one year ago. High expectations are still priced in.

Ratios from Yahoo! Finance

By nearly every ratio, Under Armour is far pricier than Nike or Adidas. You can argue that it deserves the valuation because its growth is high and its opportunities for expansion seem almost limitless at present. Guidance for 2013 was raised to $2.26 billion, a 23% increase over 2012, with operating income expected to grow by 25%. While there should be enough growth to send Under Armour higher, if it simply meets guidance or fails to reach these numbers investors may find a chink in its armor that provides a buying opportunity.